We always talk about investing globally within the bond market. And one of the concerns that our investors have today is that as they look around to the global bond market, they see very low yields everywhere—aside from the United States, where yields have risen. And they’re asking us, has this negated the rationale behind going global? And to that, I would say—vehemently—no, it has not.
We advocate going global on a hedged basis. And so, you’ve really got to look at not just the overall yield level that you’re getting on your global bonds, but also, what is the currency hedge going to give you or take back from you? The currency hedge is basically selling cash in one geography and buying it back here in the United States.
That cash rate here is now much higher than overseas, which means you’re picking up a lot of yield when you add on the currency hedge. And so low yields in Europe or Japan actually are getting a boost of 2+ percentage points when you put the currency hedge on. That puts them much more on par with what you can get here, and then you still get that benefit of diversification.
So we’re advocating sticking with that global allocation and looking deeper at the hedge yields, not just [at] what you see in the paper.
I think an environment like today reinforces why you want to have an active approach in your bond portfolio. [With] a passive approach, you’re going to just accept a certain point on the yield curve or a certain maturity structure. And with the movements and volatility that we’re starting to see in bond markets today, it’s going to start increasing those opportunities for active managers to take advantage of.
Whether it is different yield curves moving against one another or relative to one another, or whether it’s different sectors rallying and selling off at different times, or whether it’s just the shape of the yield curve adjusting over time, as an active manager, you can take advantage of those opportunities. As a passive investor, you cannot.